Investors Focused on Managing Risk in Fixed Income

With interest rates and inflation expected to rise in the months ahead, investors and advisors are focusing their attention on managing the risks in their fixed income portfolios, according to panelists at Wednesday’s Closed-End Funds and Global ETFs Capital Link Forum.

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With interest rates and inflation expected to rise in the months ahead, investors and advisors are focusing their attention on managing the risks in their fixed income portfolios, according to panelists at Wednesday’s Closed-End Funds and Global ETFs Capital Link Forum.

“The advisors and investors know there’s this embedded issue right now,” with the fixed income market, said Scott Burns, director of ETF research at Morningstar, who moderated the ETF industry roundtable at the event.

But advisors are hesitant to sell their fixed income exposure because of the tax benefits, he added. “Don’t do portfolio-stupid things for tax smart reasons.”

According to Eric Pollackov, managing director of ETF Capital Markets at Charles Schwab, about 20-30 percent of ETF flows went into fixed income funds last year. These types of funds have evolved into more sophisticated vehicles, he said.

Solomon Teller, head of investment analytics at ProShares, said there are some risks in investors’ fixed-income portfolios that they may not be aware of, such as the measured risks in the Treasury space. Long-only treasuries carry over 150 percent of the volatility relative to equities, he added.

To manage these risks in a portfolio, Teller recommends adjusting the duration of the bond exposure up and down the yield curve. Investors can also refocus where they want exposure, adding municipal bonds, high yield, credit, or inverse exposure to reduce and isolate risk. Clients are also looking at long/short alternative strategies to stabilize portfolio risk and substitute for fixed income exposure.

Burns said he’s been seeing demand for long/short hybrid funds in the ETF space, especially in the advisory market, as fee-based business grows and investors seek lower volatility strategies. As a result, Morningstar has been investing heavily into its alternative investments research, he said. Advisors seek these strategies in an ETF wrapper because of the lower costs and increased transparency associated with ETFs.

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